Eike Batista’s boom and bust

VANCOUVER — How do you turn US$35 billion into less than US$400 million in 18 months?

You have to spend a lot of money, to be sure. For starters, how about paying US$1.3 billion for an asset that other players were only willing to bid half that much or less to acquire? Then repeat that sort of maneuver several times over.

Second, borrow money to develop those assets, leaving you with debt to service. Third, make sure the assets fail to live up to the value you promised.

Finally, ensure most of your multi-billion dollar valuation stems from shares in companies making these economic errors. That way, when the market realizes the gambles have gone awry, those shares plummet in value, erasing your billions and forcing you to firesale everything from coal mines to luxury yachts.

Welcome to the world of Eike Batista. Two short years ago Batista was the embodiment of Brazil’s burgeoning dreams, a diversified businessman climbing the ranks of the world’s wealthiest and building Brazil’s dreams of natural resource riches as he went.

Ever outspoken, in 2010 Batista boasted 2 million Twitter followers. Ever flamboyant, the former speedboat racer married and then divorced a supermodel, kept a Lamborghini and a Mercedes-Benz SLR McLaren in his living room, and loudly proclaimed his intention to be the richest man in the world.

He was a poster boy for the new Brazil, until his track record of overpromising and underdelivering caught up with him

Oil was Batista’s biggest downfall, but minerals are where he got his start.

In 1980 Batista was a 23-year-old engineering school dropout bumming around Europe when he came upon a magazine spread about the Amazon gold rush. Having grown up with Brazilian mining legend Elizer Batista as a father, the younger Batista saw opportunity in those images of pick-and-shovel garimpeiro miners, and soon arranged to buy a stake in a rainforest gold mine.

His father thought it a terrible idea, but through mechanization and scale the young Batista turned a healthy profit off his Amazon gold gamble. A few years later Batista took over a small Toronto-based exploration company and renamed it TVX Gold. By 1996 TVX Gold had developed mines in Brazil, Canada and Chile and was worth more than $1.5 billion.

Then, in a foreshadowing of his recent mega meltdown, Batista’s TVX Gold story fell apart. The company tried to develop a gold mine in Greece but failed in the face of immense public opposition. Amidst that mess Batista pressed ahead with mines in Russia and the Czech Republic, but the falling price of gold stymied those efforts. By the time Batista resigned from TVX Gold in 2001, the company had lost 96% of its peak valuation.

Batista was unabashed about the demise of TVX Gold — especially because a nascent resource boom in his home country of Brazil was opening up a world of opportunities. Most of the chances Batista pursued involved oil, coal, natural gas, and resource infrastructure, but he also maintained an eye for gold.

Remember Ventana Gold? Ventana was the Toronto-based explorer that discovered the La Bodega gold deposit in northern Colombia. The initial hole at La Bodega returned 107 metres grading 7.8 grams gold per tonne, and by early 2011 Ventana had defined 27 million inferred tonnes at the site grading 3.9 grams gold, 21.5 grams silver per tonne and 0.14% copper. A scoping study outlined an underground mine producing 300,000 oz. gold annually for the first six years of a 14-year mine life.

Shortly thereafter, after rebuking several lower offers, Ventana agreed to be taken out by Batista’s EBX Group for $13.06 per share. The $1.1-billion offer represented a 30% premium to Ventana’s price before EBX started its courtship, and happened just months before the gold price peaked at US$1,895 per oz.

EBX Group is the structure that united the companies Batista controlled, a list that until recently included five public companies and at least that many private entities. One of those private vehicles, called “AUX,” now owns La Bodega — and the vultures are circling, gleeful in the knowledge that Batista used each of his companies as collateral for the others to raise capital during his rise, and so must now sell everything of value under the EBX flag.

AUX is listed as collateral for US$1.5 billion that EBX owes Mub-adala Development after the Abu Dhabi sovereign wealth fund converted a preferred equity investment into debt last month. Mubadala wants its money, so AUX has to go.

It is impossible to know what kind of numbers are being bandied about. A year ago Batista said he had nearly sealed a deal with Qatar to sell half of AUX for US$2 billion. Today, that is a dream. La Bodega reportedly hosts 11 million oz. gold in resource, but with the price of gold down more than 30%, a dearth of capital among mining companies and a generally bleak mining M&A market, it wouldn’t be surprising if La Bodega went for half what EBX paid for it.

If it did, it would stand out as one of Batista’s better returns.

It wasn’t supposed to turn out this way, of course. In 2002 Batista started building his empire, spending the next four years laying the groundwork for his utility company, MPX Energy, and his iron ore venture, MMX. In 2007 he announced the creation of OGX, Brazil’s first independent oil and gas explorer and producer. Batista brushed aside questions about his utter inexperience in oil and gas by luring over executives from Petrobras, Brazil’s state-controlled oil company. He said his OGX dream team would discover all the deposits that Petrobras had missed.

Soon Batista had established no fewer than five public companies, all branded with the letter X to symbolize Batista’s “multiplication of wealth”. He had shed the image of a pampered playboy in favour of a new mantle: Brazil’s alpha investor and the world’s eighth-richest man.

With all these entities, Batista attended to most aspects of his business — not just the mining and exploration but the infrastructure as well. He built oil tankers, bought trucking companies, and in true Batista style, started building a massive new super port at Acu, five hours drive north of Rio de Janeiro. The super port was the cornerstone of Batista’s plan, wherein shipping unit OSX Brasil would pay rent to logistics operator LLX to move oil for OGX. Meanwhile, OGX would also produce natural gas to fuel MPX Energia’s generators, which would supply electricity to MMX’s iron ore mines.

Brazil bought into the Batista show completely. At Batista’s peak two years ago, OGX was the bluest chip on the Sao Paulo exchange and boasted a US$35-billion market capitalization. The company’s public goal was to be producing more than 1 million barrels of oil a day by 2019 — which would have amounted to almost half of Brazil’s total output — and in 2010 OGX estimated the “potential resources” within its leases at 4.8 billion barrels.

That was before OGX had drilled a single well.

A lack of data didn’t deter Batista. He loved to describe his holdings of shallow offshore oil and high-grade Colombian coal as “idiot-proof assets,” and in 2011 everyone wanted a piece of Batista’s surefire success. General Electric, BlackRock, Pimco, the Ontario Teachers’ Pension Fund and Abu Dhabi’s Mubadala are among the list of mega companies and funds that lent Batista money or invested alongside him.

It would have been a great story — the first time an independent Brazilian company produced offsh
ore oil — had it worked. But OGX did things wrong from day one. For example, it paid US$1.3 billion for 21 offshore oil blocks at a government auction, seven in what is known as the Campos basin. Campos is a proven oil area, already responsible for 80% of Brazil’s output, but OGX’s bid startled its competitors. Petrobras reportedly offered half as much. Anadarko Petroleum, an experienced offshore producer, bid only a quarter of what OGX offered.

With blocks in hand OGX proclaimed its impending oil wealth widely. Expectations climbed and climbed, until an April 2011 report by independent auditors marked down large portions of OGX’s reserves from “contingent” to the less confident “prospective.”

OGX still raised US$2.6 billion soon after to drill its Campos field test wells, and loudly touted a 100% success rate. When OGX geologists realized the geological formations were more complex than anticipated and much of the oil was locked away, OGX revised its success forecast to 87%. When it took almost a year longer than promised to transition from drilling rigs to production platforms, Batista went back to the bond markets and raised another US$1.1 billion.

Then came news that well pressure in another area, the vaunted Tubarao field, was averaging 75% less than expected. After an eight-month review by U.S. oil field services giant Schlumberger, OGX announced it was abandoning several of its fields. Long story short, the company’s leases are essentially duds.

Investors have fled. OGX is trading at US9¢ a share. The company has total debt of more than US$5 billion, more than 16 times its market value. If it fails to pay off this epic pile of bonds, it would be among the largest defaults in corporate history.

Brazil is entwined in Batista’s fall as well. Carried away by Batista’s grand promises, the publicly subsidized National Development Bank loaned Batista US$2.9 billion at rock-bottom rates, funds that may be irretrievable.

Batista now spends his days renegotiating debts and relinquishing control of business units. EIG Global Energy Partners now controls the Acu port complex, a joint venture between Mubadala and commodities trader Trafigura are buying assets from MMX, and CCX is selling its two open-pit coal mines in Colombia to the Turkish group Yildirim for US$50 million, with a deal for its underground mine and accompanying rail and port facilities to follow.

On a personal front, Batista has sold his planes and his helicopter. He is no longer on the Bloomberg Billionaires Index and is likely facing personal bankruptcy. However, he is sure he will stage a comeback.

In an op-ed for Brazil’s Valor Economico newspaper in July, Batista said he would honor all of his obligations. The man who loved to give private helicopter tours of his developing super port, who said his non-producing companies held embedded assets worth US$2 trillion, is now blaming others, arguing his auditing firm made mistakes and his executives built shareholder expectations unreasonably.